Supreme Court Could Consider RJR Stock Drop Case

An updated docket sheet on the U.S. Supreme Court website shows the court has invited the
U.S. Solicitor General to file a brief in the case of Tatum v. RJR Pension Investment Committee et al., which asks
whether an employer breaches its fiduciary duty to retirement plan participants
under the Employee Retirement Income Security Act (ERISA) by dropping an
investment from a plan without thoroughly investigating the prudence of doing
so.

The case also asks important procedural questions about what
legal standards a fiduciary retirement plan committee should be judged against
if it is found to have caused a loss to participant accounts—as well as
questions about which party bears the burden of proof in ERISA litigation.

The long-running case was most recently argued before the 4th U.S. Circuit Court of Appeals, though its history extends back to
retirement plan committee decisions made in 1999, and a subsequent 2002 class
action. In something of a different take on the “classic” stock drop litigation,
which claims an employer waited too long or never moved to remove poorly performing
company stock from its ERISA retirement plan, the participants claimed RJR sold
employer stock at an inopportune moment, leading to significant but unnecessary
losses to participant accounts.

According to case documents, on the day of liquidation, the Nabisco
Holdings stock in question traded at $8.62 a share (60% less than its value
after the spinoff of Nabisco from RJR) and Nabisco common stock at $30.18 (28% less). Within a few
months the stock prices started rising, and less than a year later, after
Nabisco became the object of a bidding war, the prices had climbed 247% and
82%, respectively.

In the Circuit Court’s decision, Judges Diana Gribbon Motz and Albert Diaz partly
affirmed, vacated and reversed the decision of the U.S. District Court for the
Middle District of North Carolina, for a second time remanding the case for
additional lower-court judgments. Judge J. Harvie Wilkinson III wrote a
dissenting opinion—for a 2-1 decision.

The appellate court majority upheld the lower court’s ruling that the
RJR retirement plan committee had indeed breached its fiduciary duty by dumping
the employer stock as an investment. “[T]he extent of [the committee’s]
procedural imprudence appears to be unprecedented in a reported ERISA case,”
the circuit court majority wrote. Still, it rejected the district court’s legal
standard for determining RJR’s liability and reversed the lower court’s order dismissing the
two plan committees as defendants.

After this, RJR Tobacco Company petitioned the Supreme
Court for a writ of certiorari, asking the top court to step in and overturn parts of the 4th Circuit decision.

RJR argues the 4th Circuit decision “deepened a well-documented
circuit split over which party bears the burden of proof on loss causation
under §1109.”

“Five circuits hold that the burden remains on the plaintiff
at all times,” the writ suggests. “The Fourth Circuit, however, has joined the
Fifth and Eighth Circuits in holding that the burden of proof on loss causation
shifts to the defendant after a finding that the defendant breached a fiduciary
duty and the plan incurred a loss.”

RJR says the 4th Circuit then further distanced itself from
the majority approach by holding that a fiduciary with a duty of prudence can
be held liable for an “objectively prudent decision.”

“Specifically,
the majority held that the defendant can
satisfy its shifted burden only by showing that it is ‘more likely than
not’ that
a hypothetical prudent fiduciary would have made the exact same decision
as the
defendant,” the writ continues. Judge Wilkinson dissented from the
appellate panel’s majority decision regarding both the burden of proof
and the substantive standard for
loss causation.

The writ concludes that the questions the Supreme Court should
consider are as follows:

(1) Whether the plaintiff bears the burden of proving loss
causation under §1109 or whether it can shift the burden on that element to the
defendant by carrying its burden on the analytically distinct elements of
breach of fiduciary duty and loss to the plan; and

(2) Whether an ERISA fiduciary with a duty of prudence can
be held liable for money damages under §1109 even though its ultimate
investment decision was objectively prudent.